The Power of Renewable Energy

Development and Finance Options for Local Governments

ARTICLE | Oct 27, 2017

By Chad Laurent and Kalee Whitehouse

In recent months, local governments, states, and businesses have increasingly voiced their commitments to establishing renewable energy goals. These commitments have spurred many communities to reexamine their energy supply and find ways to integrate renewable energy.

A total of 200 U.S. cities have committed to the Paris Agreement, and 118 mayors have endorsed a goal of powering their communities with 100 percent renewable energy working with the Sierra Club's Ready for 100 initiative.

Internationally, 7,463 cities participate in the Global Covenant of Mayors for Climate & Energy (http://www.globalcovenantofmayors.org). This initiative, announced by the Compact of Mayors and Covenant of Mayors in June 2016, commits the communities to reporting and measuring greenhouse gas emissions and creating targets for decarbonization.

Managers, local officials, and staff have opportunities to use legislation, streamlined processes, and financing to move their communities closer to achieving renewable energy goals.

Ways Forward

The options available to local governments for supporting renewable energy development and financing depend on their federal, state, and local policies, and utility jurisdiction context.

Some of the largest context-specific factors that can impact renewable energy development include 1) whether the local utility is in a regulated or deregulated market; 2) is vertically integrated; 3) whether it is investor-owned, a municipal utility, or a rural electric cooperative; 4) if the state has a renewable portfolio standard; and 5) if the state allows third-party financing.

State policies in the United States could, for instance, disallow net metering, or third-party financing models that make power purchase agreements and leasing unavailable to residents, local governments, and businesses.

Communities with municipally-owned (versus investor-owned) utilities will often have greater latitude in how they manage their energy supply portfolio and can push for renewable energy financing and development.

To chart a path to 100 percent renewable energy supply or to meet a specific target, it is vital that cities and counties first understand how these factors impact their ability to meet their goals and use the levers available to them. To learn how to navigate these specific circumstances, local government managers may want to refer to Pathways to 100: An Energy Supply Transformation Primer for U.S. Cities (see Resources List at the end of this article).

Legislative Levers

Local governments have a host of legislative levers available to them to promote the development of renewable energy. They can support state-level legislation that enables more renewable energy development, including renewable portfolio standards and compensation programs for renewable energy generation such as net metering, feed-in tariffs, and value of solar tariffs. Or, they can implement these strategies on the local level.

At the local level, here is how governments can look to encourage renewable energy development:

Providing programs that encourage on-site renewable energy. Through mandates or development incentives, local governments can encourage the deployment of renewable energy. South Miami, Florida, for example, passed a law in July 2017 that requires solar panels be installed on all residential new construction.

The policy requires that "175 square feet of solar panel to be installed per 1,000 square feet of sunlit roof area, or 2.75 kw per 1,000 square feet of living space, whichever is less."1

Density bonus and other development incentives have also been used. Pullman, Washington, for example, grants developers up to five density bonus points for new planned residential developments by incorporating solar orientation or solar energy systems into 50 percent or more of proposed dwelling units (17.107.040).

Enacting a consumer choice aggregation program (CCA). Some states2 allow local governments to choose an electricity provider for their local government, residential, and business accounts through a CCA. CCAs are often pursued to obtain a lower cost of electricity than the current utility provider, include a higher percentage of renewable energy, and provide a long-term fixed price to avoid energy cost volatility.

Negotiating franchise agreements. Local governments with an investor-owned utility often will have franchise agreements with the utility. When contracts are due to expire, the utility provides the community with additional opportunities to readdress some terms of the contract and use the agreement to help transform the energy supply.

This can include establishing new funds with the utility or establishing a city-utility partnership, allowing the utility and local government to establish shared goals.

Providing financing for renewable energy projects. Local governments can enable financing at a local level for residents, businesses, and nonprofits. This can be done by establishing a revolving loan fund for renewable energy projects, loan loss reserves, or credit enhancements for local energy project development.

States also can enable property-assessed clean energy financing (PACE),3 which can be implemented on a local level.

Reducing Soft Costs

In addition to financing, local governments can control local processes for renewable energy projects, including permitting, zoning, taxation, and planning. Through streamlining these processes, local governments can reduce unnecessary red tape and non-hardware costs that arise from these projects.

These costs, known as soft costs, can add more than 50 percent to the up-front costs of installing a renewable energy system. With more than 18,000 permitting jurisdictions4 in the U.S., aligning these processes or simplifying these processes regionally represents a significant opportunity to make it easier for developers, residents, and businesses to develop renewable energy projects.

In Germany, a solar project can be completed and interconnected to the utility within four days. In the U.S., it is not uncommon for this process to take four months. Positively, ICMA's 2016 Solar Survey of Local Governments5 found that the number of local governments with expedited permitting for solar energy systems is increasing.

Similarly, clear zoning regulations for renewable energy systems can help identify opportunities to develop large- and small-scale renewable energy projects and proactively plan for renewable energy project development.

Financing Models for Municipal Supply

To achieve greater use of renewable energy, local governments will need to make investments in infrastructure, energy efficiency, monitoring and evaluation, and more importantly, their energy supply. Given this context, it is imperative that local governments understand how to finance renewable energy projects.

Renewable energy projects will generally need these three elements to be financed and built:

Capital. Since there are no fuel costs associated with wind and solar projects, the cost of the system will be up-front. Often, developers will need capital through cash or loans to undertake a project. This capital can be provided by a tax equity investor for the third-party-owned systems, the owner of the project, or the other investors.

Power purchaser. A project will need a purchaser of the power that is generated. This ideally takes the form of a long-term power purchase agreement (PPA). A power purchase can also take the form of a lease or net metering credit agreement depending on the state regulatory context.

A contract for the sale of the renewable energy certificates. Renewable energy certificates (RECs) are created to track and verify renewable energy production for the purposes of renewable energy portfolio standards, or for entities to make a renewable energy claim. A REC is created once a renewable energy system has generated a certain threshold of energy and supplied it to the grid.

A project owner can either sell the RECs directly to utilities in compliance markets or to third parties in the voluntary REC market. These sales generate income for the project owner and are often facilitated by a REC broker.

Communities have traditionally transformed their energy supply by procuring on-site and remote net-metered—where allowed—renewable energy projects. These projects have traditionally been financed through direct ownership and capital or third-party ownership (where allowed), or communities have opted to purchase RECs to match their electricity demand.

Without the option for third-party ownership models, local governments have often relied on traditional sources of capital for purchasing the system up-front, including issuing municipal bonds.

Power purchase agreements and third-party ownership. As noted previously, every renewable energy project requires an entity to purchase the renewable energy that is produced. Third-party ownership models are allowed in some states and reduce the up-front costs of a renewable energy system by allowing a third party to retain ownership of the system, while the offtaker (a solar-plant owner) only pays for the energy that is produced or makes a lease payment.

Entities like cities and nonprofits without a tax "appetite" cannot take advantage of the federal tax credits in the U.S. Third-party ownership allows a tax-equity investor to take the tax credit and pass along savings to communities and nonprofits allowing these entities to indirectly benefit from the investment tax credit.

Third-party ownership models also allow communities to reduce any up-front costs because they do not have to pay for the system, operations and maintenance, or decommissioning.

Virtual or remote net metering agreements. Local governments may be allowed to use remote net metering or virtual net metering for their procurements. Virtual and remote net metering allows a local government to credit electricity produced off-site to be credited towards its utility meters on a different location.

In places that allow for virtual net metering, community solar is often an option for community members. This allows participating community members to use electricity produced by a community's renewable energy project to offset their meters. Currently, virtual net metering is available in six states.

Opportunities

As local officials seek to understand their role in transforming their energy supply, they can look to such other entities as corporations that are developing pathways to support and purchase renewable energy for their operations.

Corporations are increasingly using virtual or synthetic PPAs to meet their renewable energy targets. Virtual PPAs are appealing because the purchaser does not need to be within the same utility territory and is not limited by state regulations regarding third-party ownership.

Under a virtual or synthetic PPA, a renewable energy system is owned and operated by the developer. The developer enters into an agreement with a local government or business for an agreed-upon price of energy generated. The main difference between a virtual PPA and a direct PPA is that a virtual PPA does not deliver the electricity to the locality.

Rather, the energy is sold to the grid at a retail rate, and the developer pays or collects the difference between the market and PPA prices.6 This option may appeal to communities moving forward that feel restricted by state policies or local markets, and burdened by the up-front capital that direct ownership requires.

To understand how such other entities are approaching their renewable energy goals, local officials can access the Rocky Mountain Institute Business Renewables Center, the World Resources Institute, and the World Wildlife Fund Buyers' Principles (see Resources List).

Endnotes and Resources

1 www.miamiherald.com/news/local/community/miami-dade/south-miami/article162307863.html

2 https://web.archive.org/web/20170315071225/http:/apps3.eere.energy.gov/greenpower/markets/community_choice.shtml

3 https://energy.gov/eere/slsc/property-assessed-clean-energy-programs

4 U.S. Department of Energy. May 2016. https://energy.gov/sites/prod/files/2016/05/f32/SC%20Fact%20Sheet-508.pdf

5 ICMA. SunShot Solar Outreach Partnership. 2016. Solar Survey of Local Governments, 2016. https://icma.org/sites/default/files/308499_17-030%20Solar%20Survey%20Results%20Summary%20Report.pdf

6 Kent, Christopher. Green Power Partnership. Introduction to Virtual Power Purchase Agreements. U.S. Environmental Protection Agency. https://www.epa.gov/sites/production/files/2016-09/documents/webinar_kent_20160928.pdf

Chad Laurent is vice president and general counsel, Meister Consultants Group, Boston, Massachusetts (chad.laurent@mc-group.com). Kalee Whitehouse is a consultant at Meister Consultants Group (kalee.whitehouse@mc-group.com).

 

SolSmart

SolSmart is a community designation program, funded by the U.S. Department of Energy SunShot Initiative, which recognizes communities that have taken steps to make it easier for businesses and residents to go solar. The SolSmart program aims to reduce solar "soft costs," the non-hardware costs of going solar like permitting, financing, installation labor, and customer acquisition.

Communities pursuing SolSmart designation are eligible for no-cost technical assistance from a team of national solar experts. Learn more at www.solsmart.org.

 

Better Communities Alliance

The U.S. Department of Energy's Better Communities Alliance (BCA) is a partnership that brings together public and private sector leaders to deliver energy efficiency, sustainable transportation, and renewable energy solutions that create cleaner and more prosperous communities for all Americans.

The BCA provides local governments with integrated expertise, resources, and peer-networking opportunities from government, nonprofit, philanthropic, and private sectors. For information, check https://betterbuildingsinitiative.energy.gov/bca.

 

Resources List

U.S. Department of Energy: Office of Energy Efficiency & Renewable Energy. Pay for Energy Initiatives. https://energy.gov/eere/slsc/pay-energy-initiatives

Laurent, Chad, et al. 2017. Pathways to 100: An Energy Supply Transformation Primer for U.S. Cities. Meister Consultants Group, Inc. http://www.mc-group.com/wp-content/uploads/2017/05/MCG-Pathways-to-100-Energy-Supply-Transformation-Primer-for-Cities-1.pdf

ICMA. SunShot Solar Outreach Partnership. 2016. Solar Survey of Local Governments, 2016. https://icma.org/sites/default/files/308499_17-030%20Solar%20Survey%20Results%20Summary%20Report.pdf

Kent, Christopher. Green Power Partnership. Introduction to Virtual Power Purchase Agreements. U.S. Environmental Protection Agency. https://www.epa.gov/sites/production/files/2016-09/documents/webinar_kent_20160928.pdf

U.S. Department of Energy. Better Communities Alliance. https://betterbuildingsinitiative.energy.gov/bca

U.S. Department of Energy. May 2016. https://energy.gov/sites/prod/files/2016/05/f32/SC%20Fact%20Sheet-508.pdf

http://www.miamiherald.com/news/local/community/miami-dade/south-miami/article162307863.html

https://web.archive.org/web/20170315071225/http:/apps3.eere.energy.gov/greenpower/markets/community_choice.shtml

https://energy.gov/eere/slsc/property-assessed-clean-energy-programs

Rocky Mountain Institute Business Renewables Center, https://www.rmi.org/our-work/electricity/brc-business-renewables-center

World Resources Institute, http://www.wri.org/publication/corporate-renewable-energy-buyers-principles. World Wildlife Fund Buyers' Principles, https://www.worldwildlife.org/pages/powering-businesses-on-renewable-energy

 

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